How to create a balanced portfolio with SIPs?

A mutual fund is a prudent way to form your investment portfolio to meet your life goals, particularly your long-term goals. But the question is what are the stepwise measures you must abide by to create a balanced mutual fund portfolio through Systematic Investment Plans (SIPs)?

Your investment portfolio must be designed based on two principles. Firstly, you must ensure your investments are in alignment with your financial goals. Never aimlessly invest in any mutual fund. The next principle is discipline. When you invest in a mutual fund through an SIP, you must be disciplined and patient, and not be influenced by short-term market movements. Discussed here are some important steps to build a balanced investment portfolio with SIPs.

·         Beware of your risk appetite and investment horizon

Before selecting a mutual fund to begin your SIP, you must first jot down your long-term, medium-term, and short-term goals and their respective time or investment horizons. As mutual fund investment consists of differing degrees of risk, ensure to consider your age, financial position, and anticipated income growth over time to evaluate your risk tolerance level.

Tailor your mutual fund portfolio based on your risk appetite. For example, if you have a mid to low-risk tolerance level, then you may prefer opting for an investment portfolio that contains an equal concentration of both equity and debt funds even for your long-term goals.

·         Use an asset allocation strategy

Asset allocation is the procedure of diversifying your market investments through distinct asset classes like cash equivalents, equities, debt, etc. The goal of using an asset allocation strategy is to balance out your investment portfolio’s risk and rewards as per your risk tolerance level and financial goal’s investment horizon.

As equity funds can be volatile over the short run, you must consider investing in short-term debt mutual funds to meet your goals maturing in 3 years owing to their higher income and capital preservation features. If you have long-term growth but your risk tolerance level is mid to low, then you may consider investing equally in debt mutual funds and equity mutual funds.

·         Form a diversified investment portfolio

Often, there are investors who tend to place their entire investible amount in just one sector, theme, or scheme that delivered high returns in the past few years. However, this concentrates your risk in the market in just one sector, theme, or scheme. Unfortunately, if your selected theme or sector witnesses adverse market phases or the fund manager takes a wrong investment decision, then your investments might underperform in the long term.

So, instead of putting all your eggs in one basket i.e., all your funds in one investment scheme or fund, diversify your mutual fund investments throughout distinct funds to reduce the concentration risk. This is because, if any fund underperformers, then the other mutual funds in your investment portfolio can compensate for the loss.

·         Periodic monitoring and rebalancing

Portfolio management does not end with the formation of your investment portfolio. It is necessary for you to monitor your portfolio’s performance timely. Just as routine exercise and a healthy diet are important for your physical well-being, proper rebalancing of your portfolio is crucial for your financial well-being.

Rebalancing your original allocation is important. Doing so allows you to attain your financial goals in a timely manner. By periodically reviewing your investment portfolio, you can identify funds that are constantly underperforming and accordingly take corrective measures. You can consider liquidating your fund if you view any change in the fund’s management, strategy, or organisation or foresee any considerable deterioration in the prospects.

Ending note

Your selection for mutual funds must be based on risk tolerance level, investment goals, and investment duration. Besides this, you must also follow an asset allocation strategy, create a diversified portfolio, and periodically monitor and rebalance it.

Comments are closed.